This option is relevant to customers who do not want to install apps from the Microsoft apps store, and prefer to manually add the .app files to their internal catalog, so users will then install apps on their sites only from the company's internal catalog.

In case you manually add an app to your internal catalog in on-premises SharePoint 2013/2016, you still need an active connection to KWizCom's CDN (apps.kwizcom.com), so you cannot have this in a completely closed environment.

You cannot have the same app installed both from the Microsoft App store and from the company catalog at the same time within the same site collection. That would give an error during adding the app.

To update your installed product with a new version

No need to install anything. All you have to do is:

Clean your browser's cache and close all browser windows.

When you browse the pages that use the app, your browser will download the updated app's javascript files.